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Oil Producers’ $94 Bln Debt Meltdown After Two Years of Cheap Crude

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The nations of the Gulf Cooperation Council might not have enough oil export revenues to fund their excessive debts in the medium-term due to low crude prices, possibly resulting in the financial insolvency of the least diversified economies of the region.

 

Kristian Rouz – Amid persistently low oil prices, the most indebted of the oil producing countries are facing debt collapses, as much as $94 bln worth of borrowed capital is in danger of being wiped out in a manner similar in fashion to December’s Third Avenue crash. However, what the US economy saw as a massive, yet tolerable loss of money in one of its many sectors, oil producers would see it as a disaster for their national economies. The ongoing decline in growth prospects in the Middle East amidst political, military, and sectarian tensions, aside from the aftereffects of cheap oil, might invoke decreases in investment activity and credit rating downgrades. Consequently, the golden age for crude oil exporters might be effectively over in two years, unless a structural reform aimed at increasing the role of oil processing and development of other sorts of economic activity is enforced.

According to estimates made by the British bank HSBC, the nations of the Cooperation Council for the Arab States of the Gulf (Gulf Cooperation Council, GCC), will have to pay back or restructure $94 bln in debt within the next two years, including $52 bln worth of bonds and $42 bln in syndicated loans. The lion’s share of that debt accrues to the United Arab Emirates and Qatar, one of the world’s major crude oil suppliers. Additionally, the GCC nations will have to deal with a $395 bln deficit in fiscal and foreign trade accounts over the period, exacerbating the situation to the point of insufficiency in FX reserves to cover the losses.

Should these nations extend their selloffs in US Treasuries, which are held by their governments in order to finance their FX rate stability and budget losses, they would be short of cash to refinance their debts.

“[This] will complicate efforts to refinance existing paper that matures over 2016 and 2017," Simon Williams of HSBC wrote. "With the Gulf acting as a single credit market, the refinancing challenge will likely be much more broadly felt … compounded by tightening regional liquidity, rising rates and recent downgrades."

The Middle Eastern oil producers will be facing increasing debt pressure until 2020, and the UAE will be paying back or otherwise refinancing their obligations, which account for the largest share of the $92 bln total debt burden. In the medium-term, the low oil prices would not provide the GCC nations with enough export revenues to allow them to meet all of their obligations.

The overall volume of the GCC countries’ indebtedness, including securities maturing post-2017, stands at $610 bln.

Recent credit rating downgrades by the world’s leading agencies have made the situation worse, making debt restructuring more complicated for the GCC nations. Standard & Poor’s revised downward the Saudi and Omani debt, and junked Bahrain’s credit rating first time on the record.

Another rating agency, Fitch, however, reaffirmed the credit ratings of major UAE banks, including Abu Dhabi Commercial Bank, National Bank of Abu Dhabi, FGB, Emirates NBD, and Union National Bank. Part of the reason is the UAE's financial sector and infrastructure are far more developed than those of their neighbors.

“We view Abu Dhabi, and by extension the UAE, as a resilient economy, supported by robust growth, particularly through strong government spending on infrastructure projects and an expanding non-oil sector. However, growth is moderating in response to lower oil prices,” Fitch noted.

HSBC, in turn, expects a greater scale of GCC bonds being issued in order to finance short-term obligations, resulting in an even greater  debt imbursement in these nations, which eventually might lead to a full-blown financial crash should low oil prices linger medium-to-long term. For now, HSBC confident  GCC countries will service their debts properly in the short-to-medium-term.

 

Related:
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Tags:
debt, oil prices, market review, UAE, Saudi Arabia
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  • FlorianGeyer
    It may be that the Gulf Oligarch class will have a wee bit of unrest at home that could morph into civil wars. We may then see a few Oligarchs hanging upside down from lampost's .
    I for one would not shed a tear for them.

    The plus side for Russia etc would be an increase in the oil price whilst the Arabian oilfields suffer the same fate as those of Syria under the US trained and equipt DAESH control.

    What goes round ,comes round.
  • michael
    and this will also limit certain countries' war plans??
  • The one Who knows
    Just like shale sector in the US of A soon the whole countries may be dropping like flies... and all this has been already said and happened in history (source: independenttrader.org/shale-producers-on-the-brink-of-going-bust.html)
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